Explainer: What is Confidential pre-filing | The Financial Express

Explainer: What is Confidential pre-filing

Confidentiality ensures there is no pressure on the company to go for an IPO, Nazki says.

Explainer: What is Confidential pre-filing
The new regulation allows for confidentiality.

By Siddhant Mishra

Tata Play last week became the first Indian entity to opt for a confidential pre-filing of offer documents for its IPO. The new mechanism introduced by the Securities and Exchange Board of India has caught the attention of the market. Siddhant Mishra explains its features and impact on future listings

What is confidential pre-filing?

SEBI, in its September 30 circular, mentioned the introduction of pre-filing of offer documents as an alternative to traditional filings for an IPO on the Main Board. The idea is to allow issuers to carry out limited interaction without making any sensitive information public. Consequently, Sebi’s observations will be available to investors for at least 21 days to help their investment decision-making, the circular stated.A draft red herring prospectus (DRHP) contains material information about a company. This could include compensation of top executives, which companies may be unwilling to disclose to rivals, says Manshoor Nazki, partner at IndusLaw. The new regulation allows for confidentiality.

What prompted the move?

Sebi has had to take a relook at the existing regulations because of companies like Zomato and Paytm — with non-conventional business models — accessing the capital markets, Nazki says. The move is inspired by the Jobs Act in the US, according to Aditya Cheriyan, partner at Khaitan & Co. He says keeping the details confidential will aid firms to ‘test the waters’ and gauge investor demand. The actual DRHP will be released closer to the intended IPO date.Khaitan & Co says this has become a preferred alternative in jurisdictions like the US, where the likes of Airbnb, Lyft, Spotify, Uber and Snap have opted for such a route. Sebi says it will allow for “disclosure of an information-rich document to investors” at an appropriate time (after the issuer is sure of listing and isn’t considering postponing this).

What are the disadvantages of the move?

Confidentiality ensures there is no pressure on the company to go for an IPO, Nazki says. Consequently, as seen in the US, companies are not wholly committed to an IPO as documents have not been made public, and there is a high chance of them backtracking on listing plans. The traditional format ensures there’s pressure to meet IPO commitments, with sensitive information already released.Abhimanyu Bhattacharya of Khaitan & Co, says, under the old format, if a company doesn’t launch the IPO, it would have released information without any corresponding benefit.

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What will be its impact on the IPO process?

This process is a bit more elaborate than the usual route, and will impact IPO expenses, says Bhattacharya. But, he says that the option is beneficial for all issuers. Mainstream sectors like manufacturing and BFSI, though, may not be too bothered with confidentiality, as their business information is already public.The Khaitan document also highlights that firms have, in the past, filed addenda to the DRHP, with updated information between the DRHP and UDRHP. The new route largely eliminates this need as the document first made public (UDRHP-I) shall be substantially updated.

Who will it benefit?

Cheriyan lists three categories of gainers. First, new-age startups, which wouldn’t want competitors accessing data on their unique models/structures.Second, firms keen on due diligence with Sebi before any information is made public. The new route allows time for full compliance before the DRHP is released. Third, firms looking to ensure minimum promoter’s contribution (MPC) — 20% of post-issue paid-up capital. Shifting this disclosure to the updated DRHP-I (UDRHP-I) stage, against the DRHP stage in the conventional route, gives firms more time for meet ing the norm.  Also, the eligibility of shares to be offered for sale must be tested at the UDRHP-I stage. This expands the scope of eligibility for new investor shares and/or existing shareholders’ recently-acquired shares. This is because the minimum holding period is calculated backwards from the filing of the UDRHP-I, as opposed to the DRHP in the standard IPO route.

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First published on: 08-12-2022 at 02:05 IST